We Have Entered the Era of the Huge State

Pandemic economic cracks have been filled with an incredible $17 trillion! This is about 16 percent of global GDP. As the pandemic shows no signs of ending (there’s always some variant lurking around the corner), and history shows that once a state has swollen, it does not return to its old ways, it is estimated that the share of the state in the economy in 2026 will be greater than in 2006. The U.S. is preparing to invest nearly $2 trillion in the welfare state, Europe is investing $750 billion in a recovery fund, Japan promises ‘new capitalism’ with even greater state generosity. There is no doubt that the pandemic has led us into the age of the huge state. However, if the private sector that finances these very states is being squeezed out, the question is where will the states finance the promised welfare? Through debt, how else.

Analyst Velimir Šonje specifies that the share of the state in global GDP was at a minimum before the last financial crisis, 2006/07. – After that, states began to grow, but not as much as they are now during the pandemic, this growth in the share of states in the economy is unprecedented. The ratio of general government expenditures in the EU has increased by about 6 percentage points, from about 52 to nearly 60 percent. In some countries that traditionally have a higher share of the state, such as France, it is already above 60 percent. In Croatia, this share has increased from about 48 to 54-55 percent. As for the trend in 2021 (data is not yet available), it is evident that the shares are holding steady, possibly slightly decreasing. Therefore, the thesis that the share of the state cannot simply return once it has been raised has considerable grounding – Šonje is categorical.

Ivan Kurtović, CEO of InterCapital Asset Management, adds that this was expected, as states opted for radical measures to close almost the entire economy. This is why massive global aid had to arrive. Until then unimaginable, ‘helicopter money‘ arrived not only to companies but also directly to individuals. The U.S. led the way, where checks were sent monthly to laid-off/(temporarily) unemployed citizens.

 – A deficit of 20 percent of GDP was not an exception but a rule. Monetary authorities supported this with significant reductions in reference interest rates and substantial purchases of government bonds, along with new debt. Do not forget that states also have their revenues (taxes) which at that moment were not in such abundant quantities as before, because people were spending significantly less (lower VAT). The economy came to a halt, and with it, corporate tax. State deficits exploded. At that moment, no one was thinking about who would pay for this and what would happen to this debt in the future. So, what next? States have taken up more and more space in the economy, society, and investments. People have become dependent, they expect further assistance, and they will expect it again in some new crisis. Here we come to the basic set of challenges, the sustainability of debt, the general impact of states, and the expectations of people and the economy. This is not a question of one individual state but a global dependency that is being created. In management, we would call this micromanagement mt, and when managers start to micromanage, the alarm bell usually starts ringing in companies – Kurtović points out.

Kristijan Kotarski from the Faculty of Political Science adds that the long-term creeping trend of interventionism, visible since the outbreak of the global financial crisis, has accelerated further, and the problem is not necessarily in the periodically more significant role of the state, but in its character.

– Recently, Western liberal democracies have increasingly anti-competitive, rather than pro-competitive decisions in the domain of public policies. It is not always the best and most efficient that wins, but those with the most generous lobbying budgets or the best lawyers. At the same time, from the Far East, we are receiving a revived and strengthened state capitalism under the firm hand of Xi Jinping’s doctrine of ‘shared prosperity’. Based on this, there is a pessimistic view of market and individual freedom in the future – Kotarski is pessimistic.

When it comes to the market, Kurtović warns that the swollen state will also lead to a more pronounced division between new and old industries, those that states can increasingly control and supervise less, as they do not have the necessary resources. The best example, he says, is the tech industry, which will continue to grow, unlike the old industry that is waiting for state regulation to tell it which direction and pace to take.

– We have not even reached the new version of the (fin)tech industry that comes with decentralization. States already do not have the resources to control and supervise old tech, how will they do so with the new? And there is also the green transition. A clean five for the declaration – by XX we want to be net-zero or whatever. But no one has ever asked how. Thermal power plants and nuclear plants are being closed while the demand for electricity is increasing (electric cars). The old industries that cannot compete with new competitors will suffer the most, plus they have small margins and bear the highest cost of the green transition in the form of extremely expensive green certificates. And where does the largest number of people work, especially in less developed countries? Precisely in old industries, right – Kurtović hammers home, bringing us back to the question at the beginning of the story: debt and who will pay it back. Therefore, he expects that the heretical word ‘privatization’ will return to the public space, especially now that global capital markets are at relative peaks.  

– We have seen an unusually high coordinated strong expansiveness of both monetary and fiscal policies globally, which is good, as it alleviates the crisis, but also controversial, as it raises expectations that the state can and must always act this way. It is to be expected that in the next economic recessions, which are inherent to market economies as they represent the cleansing and strengthening of economic structures, states will be forced to use similar or even more generous measures, thereby increasing their role and making it even more difficult. States that were fit in a macro sense (low debt, strong economy) fared better than those that were not, which sends a signal that states that have increased debt to mitigate the consequences of the crisis must quickly deleverage and become fit again – concludes Kurtović.

The question is how possible this will be, as four-fifths of the world have committed to net-zero CO2 emissions. And that is an expensive goal-toy in which most of the private sector can only assist states. And one more thing. The pandemic has rapidly diverted global wealth towards the rich – it has ‘boosted’ them from the position of super-rich to the pedestal of hyper-rich. At the same time, an additional 100 million people have been stuck in the category of extremely poor.

Let us add that in just the first year of the pandemic, around 7 million children died of hunger – a total of 54 million! In one year. By comparison, about 5.5 million people died in two years from COVID. Clearly, the pandemic has served as a global reset (Klaus Schwab and the elite of the World Economic Forum communicate this publicly) in the direction of enriching the rich, and the CO2 agenda will create new rich individuals who will profit from state interventionism.

Šonje believes that only democracy – not the market – can keep the state in check. However, the obedience of the frightened and the acceptance of – health-related! – completely senseless COVID certificates shows that democracy could merely be a comfort for the mad. We are entering a time when it is not enough to just follow the trail of money. The stakes are higher in the game. Welcome to the era of the state: ‘The Market – that is me!’